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What does the SEC and FINRA say about Digital Marketing by Investment Professionals?

There are many regulations that govern investment professional conduct with new ones having emerged recently. The are the rules about digital marketing by investment professionals?

A defining characteristic of the Internet has been speed, the speed at which business takes place, the speed at which it evolves and the speed in which competitors emerge. The industry that has been most affected by this speed has been the financial services industry. A survey of banking CEOs by Price Waterhouse Coopers found that 81% were concerned about the speed of technological change, more than any other industry sector.

Fintech or ‘financial technology’ has been responsible for the much of the change in the financial services industry.  As with the Internet itself, entrepreneurs and start-ups have been driving much of the technological change.  In other words, the incumbents or established companies are playing ‘catch-up’ to the start-ups.  The exception to this is with ‘wealthtech’ or ‘wealth technology’.  The incumbents or established companies are the market leaders and the ones driving the technological change.

Technology investment in the financial services industry is not new.  The financial services industry has long embraced new technologies and digital transformation.  Investment management companies have invested large sums of money in high-speed connectivity to execute trades between counter-parties in mere nanoseconds.

For an industry known for investing heavily in technology to gain every competitive advantage, many investment managers have been complacent when it comes to their marketing.  Instead, business development professionals have relied on analog communication with pre-existing relationships and blast emails to build their business.

The financial services industry and the investment management industry in particular is heavily regulated and rightfully so.  As you know, there are many regulations with respect to broker-dealer conduct and fiduciary responsibility.

For example, on July 5, 2019, the SEC approved the final regulations with respect to broker-dealer conduct.   Referred to as Regulation Best Interest (“Regulation BI”), the rule is separate and distinct from the fiduciary duty that applies under the Advisers Act.  The compliance date for Regulation BI is June 30, 2020.

Sources of retail investment advice in the United States

Retail investors get their professional investment advice from one of two primary sources subject to federal regulation, investment advisors and securities brokers.  Investment Advisers are fiduciaries compensated specifically for giving advice, and they are often compensated in the form of a periodic share of the value of clients.

In contrast, securities brokers give investment advice only incidental to executing trades on their client’s behalf, for which they receive brokerage commissions or other feeds on a per transaction basis.

In providing advice, securities brokers have long been subject to the suitability rule that requires them to be reasonably informed of their client’s financial circumstances and to have a reasonable basis to believe their recommendations are suitable with potential civil liability to do so.

Investment advisors were supposed to have been subject to the Department Of Labor’s Fiduciary Rule that was vacated by the U.S. Fifth Circuit Court of Appeals on June 21, 2018.  The DOL’s definition of a fiduciary demands that retirement advisors act in the best interest of their client’s and put their client’s interest above their own.

In the latest update to the Fiduciary Rule that has been struck down sought to expand the definition of a fiduciary to include any professional making a recommendation or solicitation in this area – not just simply giving ongoing advice.  However, the Department of Labor has since indicated that they are working with the SEC to resurrect the fiduciary rule.

The SEC’s Regulation Best Interest holds broker-dealers to a strict “best interest” standard that is similar to a fiduciary duty when providing incidental investment advice covering any client account.  As a result of the passage of Regulation Best Interest, FINRA has indicated that they may reexamine its suitability rule for broker-dealers.

What is the SEC’s Regulation Best Interest?

Regulation Best Interest (BI) imposes a new standard of conduct specifically for broker-dealers that increases the broker dealer standard of conduct beyond existing suitability obligations.  The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone.  It provides specific requirements to address certain aspects of the relationship between broker-dealers and their retail customers, including certain conflicts relating to compensation.

Regulation BI addresses new standards of conduct for broker-dealers.  It does not address what financial professionals can and can’t do when it comes to digital marketing.  However, both the SEC and FINRA has quite a bit to say about the use of digital marketing by broker-dealers and investment advisers.

Just exactly what does the SEC have to say about digital marketing when it comes to financial advisers?

It turns out quite a bit.

What are the SEC’s rules about digital marketing by investment professionals?

 To get an idea on what the SEC says about digital marketing, we need to look at what they say about marketing.

 SEC Rule § 275.206(4)-1  Advertisements by investment advisors

This is the passage in the SEC rules that addresses advertisements by financial advisers.  The spirit of the rule is that an advisor should not misrepresent themselves, mislead a client, publish an untrue statement, publish testimonials that refer to the services of an advisory, and defines what constitutes an advertisement.  The specific rules are below.

 SEC Rule § 275.206(4)-1(a)

It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80B-6(4)) for any investment advisor registered under section 203 of the

 SEC Rule § 275.206(4)-1(a)(1)

Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any device, analysis, report or other service rendered by such investment advisor; or

 SEC Rule§ 275.206(4)-1(a)(2)

Refers, directly or indirectly, to past specific recommendations of such investment advisor which were or would have profitable to any person:  Provided, however, that this shall not prohibit and advertisement that sets or offers to furnish a list of all recommendations made by such investment advisor within the immediately prior period of not less than one year, if such advertisement, and such a list if it furnished separately:

  1. State the name of each such security recommended, the date and nature of each such recommendation (for example, whether to buy, sell, or hold), the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each security as the most recent practicable date, and:
  2. Contain the following cautionary legend on the first page thereof in print or type as large as the largest, print or type used in the body or text thereof: “it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list”; or

 SEC Rule § 275.206(4)-1(a)(3)

Which represents, directly or indirectly, that any graph, chart, formula or other device being offered can in and of itself be used to determine which securities to buy or sell, or when the buy or sell them’ which represents directly or indirectly, than any graph, chart formula  or other services being offered and will assist any person in making his own decisions as to which securities to buy, sell, or  when to buy or sell them, without prominently disclosing in such advertisements the limitations thereof and the difficulties with respect to its use; or

 SEC Rule § 275.206(4)-1(a)(4)

Which contains any statement to the effect that any report, analysis, or other service will be furnished free or without charge, unless such report, analysis, or other service actually is or will be furnished entirely free and without any condition or obligation, directly, or indirectly; or

 SEC Rule § 275.206(4)-1(a)(5)

Which contains any untrue statement of a material fact, or which is otherwise false, or misleading.

 SEC Rule § 275.206(4)-1(a)(5)(b)

For the purposes of this section, the term advertisement shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers

  1. Any analysis, report, or publication or by radio and television, which offers (1) any analysis report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or
  2. Any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell or any security, or which security to buy sell, or
  3. Any other investment advisory service with regard to securities.

So there you have it.  Basically, the rules tell financial professionals to not misrepresent themselves or their products and services.

Many advisers will see these rules and think that it means that they can’t advertise online, but it is just not so.  In fact, it is just the opposite.  They are actually quite clear in their guidance about how you can advertise- online or off.

Unfortunately, it s not just the SEC that has regulatory authority over financial professionals, The Financial Industry Regulatory Authority, or FINRA is a private corporation that acts as a self-regulatory organization.  The successor to the National Association of Securities Dealers, Inc., FINRA also oversees member regulation, enforcement, and arbitration operations of the New York Stock Exchange.  They also have something to add that apply to online marketing.

What does FINRA have to say about digital marketing by investment professionals?

The phrase “investment strategy involving a security or securities” used in FINRA rule 2111 interpreted broadly, is among other things, an explicit recommendation to hold a security or securities.  However, the following communications are excluded from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities:

  • General financial and investment information, including:
    1. Basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment
    2. Historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices
    3. Effects of inflation
    4. Estimates of future retirement income needs, and
    5. Assessment of a customer’s investment profile
  • Descriptive information about an employer-sponsored retirement or benefit plan, participation plan, the benefits of plan participation, and the investment options available under the plan.
  • Asset allocation models that are:
    1. Based on generally accepted investment theory,
    2. Accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor’s assessment of the asset allocation model or any report generated by such model, and
    3. In compliance with Rule 2214 (Requirement for the Use of Investment Analysis Tools) if the asset allocation model is an “investment analysis tool” covered by Rule 2214; and
  • Interactive investment materials that incorporate the above.

The limitations on marketing from both the SEC and FINRA both apply to digital marketing by financial professionals as well.  That means you can advertise online, you can generate leads from your marketing activities and you can post videos and articles online.

Follow the guidelines above and focus on education.  After all, most people don’t like to be “sold to”.  They would rather be led on an educational journey of learning about you, your offerings, and how you can help them reach their goals.  This is ultimately how you establish yourself as a trusted authority and attract leads to your business.

Before doing anything, run them by your compliance department to make sure you are not violating any in-house policies.  Hopefully, this blog post demonstrates that digital marketing by investment professionals is permitted by the SEC and FINRA.

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